Smart Money?

Many African governments subsidize fertilizer for farmers. Are the subsidies worth it?

It was called Malawi’s miracle. In 2005, in the wake of a drought and food crisis, Malawi began subsidizing fertilizer and seeds to help boost farmers’ maize yields. Just two years later, Malawi produced enough maize to meet domestic demand. Other African governments quickly followed the lead set by Malawi’s “miracle,” by either restoring or starting new input subsidy programs. By 2010, Burkina Faso, Ghana, Kenya, Mali, Malawi, Nigeria, Senegal, Tanzania, and Zambia were together spending about $1 billion a year on input subsidies.

Was all that money a wise investment? While it is universally acknowledged that African farmers could increase crop yields if they applied more fertilizer, recent evidence is now calling into question Malawi’s “miracle” and the effectiveness of subsidy programs in Africa south of the Sahara. In recent studies, researchers at IFPRI and elsewhere are grappling with whether the benefits of input subsidies outweigh the costs.

“Subsidies are politically very appealing,” says IFPRI Senior Research Fellow Shahidur Rashid. “As researchers and development practitioners, our objective is to clarify whether this is the right means to reach the end objective.”

Quick Fix

When Malawi adopted the Farm Input Subsidy Program (FISP), the country relied heavily on imported food, and subsidies were seen as a way to increase domestic production. Official numbers showed improvements in yields of maize, the country’s staple food.

As other African governments committed themselves to rapidly raising agricultural spending and agricultural growth, they looked for quick returns on investment and frequently settled on input subsidies. “We have to think about these kinds of investments not only in terms of their returns, but the speed with which they can deliver,” says IFPRI Senior Research Fellow James Thurlow, who with Research Fellow Karl Pauw conducted a comprehensive study of FISP. “Subsidies are a quick fix.”

Besides raising maize yields, input subsidies offer indirect benefits, such as helping farmers diversify their crops, Pauw and Thurlow found. This happens when maize yields increase and farmers divert part of their farmland to other valuable crops such as vegetables. Farm employment, wages, and returns to cropland all increase as well. And lower food prices and higher wages help improve the welfare of both farm and nonfarm households. These indirect effects, the study found, may account for up to two-fifths of large-scale subsidy programs such as the FISP.

An Expensive Habit

Despite the potential for benefits, input subsidy programs in Africa warrant concern, according to Rashid and T. S. Jayne, professor at Michigan State University, who together edited a special issue of the journal Agricultural Economicson the topic. For one thing, subsidizing fertilizer is too narrow a solution to the challenges facing Africa’s farmers—including, for example, soil erosion and degradation. If farmers are planting crops in soils that are degraded and missing essential nutrients for healthy plant growth, says Rashid, “a subsidy alone is not going to solve that problem.”

Governments need to first address the widespread problem of severely depleted soils through comprehensive soil fertility management that includes educating farmers on good soil management practices. More money should be invested in infrastructure, household irrigation, and agricultural R&D, and private sector growth should be promoted. During Asia’s Green Revolution, for example, investments in complementary areas of development were key. “Investment in infrastructure helped transaction costs decline substantially, farmers adopted new technology rapidly, and safety net programs protected the poor and vulnerable,” says Rashid.

Subsidies can also eat up large shares of government agricultural budgets, mostly to pay for imported fertilizer, and crowd out longer-term investments. Malawi’s government buys fertilizer in dollars and attempts to pay back the debt in local currency by raising taxes, which creates a balance of payments problem. Now, says Thurlow, the sustainability of Malawi’s program is in jeopardy because of the country’s failure to cover the subsidy program with a strong export promotion strategy. “It doesn’t matter how well your program is targeted or how good your soil quality is if you can’t overcome the macro-sustainability issue at the end of the day,” he explains.

Beyond Subsidies

Rashid, Thurlow, and Pauw are in agreement that governments should begin to scale down their subsidy programs and make their agricultural investments more balanced. “FISP was initially designed to address food insecurity,” says Pauw, “yet people expected the program to be a blanket solution to all sorts of other development challenges, like poverty reduction and increased economic growth.” Because of the program’s high cost, however, it leaves little fiscal room to develop other policies that might be better suited to, say, reducing poverty.

“Subsidies do have a role to play in our policy toolkit given that most farmers can’t afford to buy fertilizer or can’t access the fertilizer market,” says Thurlow. They should, though, be treated as one tool among many. In Malawi, he points out, the policy debate is now shifting to the question of how to complement FISP with other investments that can address long-term needs and target the poor who have been falling through the cracks.

Rashid calls for keeping an eye on the overarching goal of food security: “Subsidies are a means to an end. The end objective here is enhancing agricultural productivity in a sustainable manner. The question is how do we get there?”

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